Egypt’s Economic Landscape: Indicators and Possible Scenarios

3 May 2018

Egypt is midway through the implementation of an economic reform program that will end in late-2019, in accordance with an agreement between Cairo and the International Monetary Fund (IMF). An IMF delegation is scheduled to visit Egypt in May 2018 to review the program and pave the way for Cairo to receive US $2 billion the following month, representing the 4th installment of the Fund’s loan.

As President Abdel Fattah El-Sisi begins his second term in office, the development of Egypt’s economy in the coming period will largely depend on what has been achieved so far. Despite improvement in some economic indicators – particularly those related to investment structures – several others identify ongoing challenges relating to the budget deficit and rising public debt

Egypt’s economy in international economic indicators

In its annual assessment of Africa’s top investment destinations, RMB Holdings ranked Egypt as the continent’s top investment destination for 2018, overtaking South Africa for the first time in seven years.[1] However, despite its economic reform efforts, Egypt ranked 100 in the WEF Global Competitiveness Report and failed to reach the top 10 in the Arab World, largely because this index monitors obstructive indicators including continuing inflation and government bureaucracy.[2]

At the same time, Egypt’s rank fell on the Corruption Perceptions Index 2017 (released in February 2018); the country ranked 117 compared with 108 in 2016.[3] Egypt ranked 128 in the Doing Business Report 2018, a fall from its position at 122 in 2017.[4] The country was also ranked 111 in terms of the UNDP’s Human Development Indicators for 2017, compared to 108 in 2016.[5]

Opportunities and challenges

As for opportunities, economic growth increased to 5.3% in the second quarter of the 2017/2018 financial year. The World Bank pointed out that remittances to Egypt reached $20 billion and are expected to continue increasing based on expectations that the exchange rate with the US dollar will stabilize.

Egypt’s trade deficit declined by 8.4% during the FY 2016/2017, accompanied by an increase of 16.2% in non-oil exports and a corresponding decline in non-oil imports by 4.5%

Foreign exchange reserves had increased to $42.5 billion by the end of February 2018, and the budget deficit declined to 1.7% of GDP during July–August of FY 2017/2018.

The number of tourists visiting Egypt increased to around 78,000 per month during the first quarter of FY 2017/2018 compared to about 55,000 during the corresponding period of the previous financial year.

Among the more challenging statistics, Egypt’s public debt (domestic and external combined) has increased from EGP 1.8 trillion to 3.2 trillion. External debt increased by 41% from US $45 billion in June 2014 to $80 billion in June 2017, and the country completed a US $4 billion bond sale in 2018. However, Egypt’s external debt remains manageable according to international standards, as it does not exceed 36% of GDP.

However, for the majority of Egypt’s citizens, improvements in macroeconomic indicators have not been reflected in living standards, which have been negatively affected by the removal of fuel and electricity subsidies and simultaneous price hikes for certain pharmaceuticals. Moreover, the liberalization of the exchange rate has cut the external value of individual earnings almost in half, significantly undermining the buying power of the Egyptian people. These factors combined resulted in Egypt’s rank in the Quality of Life Index dropping from 50 in 2016 to 59 in 2018.[6]

Despite these challenges, the IMF anticipates a drop in inflation to 12% by June 2018, falling to less than 9% in 2019. This from a high of 35% in July 2017 following the liberalization of the exchange rate, rising fuel prices, and the introduction of value added tax. Furthermore, the British-based firm PricewaterhouseCoopers (PwC) anticipates that Egypt’s economy will rank 15th among the top 20 global economies by 2050, supported by financial and structural reforms, an active business environment and a young labor force.

Bloomberg[7] cites several factors that can help the Egyptian economy progress in the coming period. These include: 1) a possible gradual decrease in inflation to the Central Bank’s target of 10–16%, which will allow the Bank to ease restrictions on cash flow liquidity by decreasing interest rates; 2) an improvement in the performance of the country’s tourism sector; and 3) rising government revenues following the launch of gas production from the Zohr field in June 2018, with an anticipated production capacity of 1.7 billion cubic feet per day (bcf/d), potentially rising to 2.8 bcf/d by the end of 2019.

Potential Scenarios

Based on the above, Egypt’s economy is likely to follow one of these three scenarios:

Scenario 1: continued gradual improvement in economic indicators owing to economic reforms, rising growth and investment indicators, and falling inflation; albeit rising public debt will remain an obstacle to any improvement that may result from the country’s economic reforms. This scenario seems highly likely.

Scenario 2: current economic reforms are extended due to prevailing structural imbalances in the economy. The government may reach an agreement with the IMF to extend the reform program by 18 months, imposing a new set of measures to address the imbalances in the economy.

Scenario 3: negative consequences result from the implementation of the IMF’s reform program, including growing social pressures and rising public debt burdens, which may push the government to resort to asset sales and dangerous levels of debt.

The improvement in Egypt’s economic indicators will likely continue in both the short and medium terms, although this will depend largely on the government’s ability to address challenges associated with rising public debt – particularly foreign debt – through improved management.

The Egyptian government must also face the resultant pressures of economic reforms and overcome the lack of improvement in living conditions by expanding the welfare system and related social protection networks.

It is therefore likely that the government will seek to improve growth whilst decreasing inflation, so that ordinary Egyptians may feel the benefits of an improving economy in the form of increases in their purchasing power.